Good day, ladies and gentlemen, and welcome to the Build-A-Bear Workshop second quarter fiscal 2010 results conference call. My name is [Modesta] and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Allison Malkin of ICR. Please proceed.

Allison Malkin

Good morning and thank you for joining us. With me this morning are Maxine Clark, Chairman and Chief Executive Bear; John Haugh, our President Bear; and Tina Klocke, Chief Operations and Financial Bear.

Before I turn the call over to management I want to remind members of the media who may be on our call today to contact us after this conference call with their questions. We ask that you limit your questions to one question at a time. This way we can get to everyone's question during this one-hour call. Feel free to re-queue if you have further questions.

Please note that our call is being recorded and broadcast live via the internet. The earnings release is available on our investor relations portion of our corporate website and a replay of both our call and webcast will be available later today on the IR site.

Before we get started I will remind everyone that forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those currently anticipated due to a number of factors including those set forth in the risk factors section and our annual report on Form 10-K and we undertake no obligation to update or revise any forward-looking statements.

Now I would like to turn the call over to Maxine Clark. Maxine?

Maxine Clark

Thank you, Allison, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal 2010 results. For our call this morning I will begin with comments on our second quarter and update you on our progress towards achieving our priorities we set at the start of the year.

John Haugh, our president, will provide additional insight into our product and marketing strategy and then Tina Clarke, Chief Operating and Financial Bear, will review our financial results and outlook. Following my closing comments we will open the call to take your questions.

Overall, our second quarter results fell short of our expectations but we remain on track towards achieving our primary goal of increasing shareholder value by profitably growing our sales. As you look back on the quarter, April cost decline met our expectations given the shift of Easter to our first quarter.

Combined comp sales for March and April were up modestly, consistent with the increase we indicated during our first quarter call. May, however, fell short of our expectations. Our comp sales trend improved in June making it the best month of our quarter as store traffic improved and the later ending of the school year brought moms and kids back to the mall.

In July we've had strong comp sales growth giving us confidence that overall our key strategies are moving us closer to achieving our objectives. Despite the roller coaster results there were several bright spots of the second quarter and some key learnings that will help us better position our business for the back half of the year.

Highlighting our accomplishments for the quarter, average transaction value rose 2% or $0.62 per transaction on a consolidated basis. We drew visits of engagement with our virtual world. We advanced our licensing programs adding an exciting new program, Build-A-Bear Craftshop Kit that will launch in all Michael stores at the end of September.

We ended the quarter with a strong balance sheet with $31.2 million in cash and invested $3.3 million since the beginning of the year to repurchase shares of our common stock. Once again, we had no borrowings on our credit line and remain debt free.

In total for the second quarter, consolidated net retail sales declined 10% which included a comp store sales decline of 9.7% in North America. In Europe, following nine consecutive quarters of comp sales increases, our comp sales declined by 11.2% driven by the Easter shift, election uncertainty and general economic concerns that weigh down discretionary consumer spending.

We believe the brunt of an initial increase in January in the UK that was buffered by the earlier Easter that we have seen the retail environment in general turn highly promotional in the UK most recently.

As I indicated, May proved to be very challenging for Build-A-Bear Workshop. We delivered our strategy to improve the size and value of our animal launches and fully integrate products, marketing and operations with the return of one of our most popular licensed properties, Tropical Hello Kitty went so well throughout the month.

However, having just one animal in the featured product story was not sufficient to drive our total business for an entire month. As soon as the focus shifted to our Zoo Animal collection, the multi-animal assortment consisting of both core and limited edition products, our business rebounded with June producing the best results of the quarter with low, single-digit decline and spring momentum that has built into strong double-digit July comp sales increases with the release of the Ice Cream Bears collection.

We are making adjustments to our product and promotional cadence to improve our performance and have a great lineup for the summer and [month-end] period. We will continue to offer approximately one new product [piece] a month but we will also be infusing some powerful promotions into the mix to maximize our reach with a pickup in mall traffic that comes with the back-to-school season.

We will have something new in product or promotion to speak to in our communication cadence approximately every two weeks in order to convert guests with newness and provide great value each time they visit a store.

On a year-over-year basis our core inventory per square foot is up modestly at 1.9% with total inventory increasing 20% including Zhu Zhu Pets, which is an added category to last year. We are comfortable with the level and content of our core proprietary inventory and have taken appropriate action to bring Zhu Zhu Pet inventory in line with the current trend of this product, which John will discuss.

We expect inventory levels to be in line with total sales trends by year-end and expect our third quarter balance sheet to show significant progress on this front. As we look forward, we expect to build on our strong start to the third quarter and believe we have the right lineup to capitalize on the back-to-school and holiday seasons.

We do expect our third quarter performance, while remaining positive, to moderate from the current double-digit sales growth as changed to the timing of promotions and advertising play out over the next couple of months.

With the backdrop of a challenging economy, we know the year won't be without its bumps. We are confident that our strategies will allow us to achieve our number one objective of increasing shareholder value by profitably growing our sales.

With that, I'd like to turn the call over to John to review our product and marketing strategies in more detail.

John Haugh

Thank you, Maxine. As Maxine indicated, our second quarter results were short of our expectations but we believe we are on the right track and expect better performance in the third quarter.

As you recall, we are focused on five key strategies for the year: first, product innovation that improves the size of our animal launches and the design and value of our products; second, full integration of products, marketing and store operations to create a sense of urgency with each new product launch; third, add complimentary experiential toy products to our assortment; fourth, grow engagement in our virtual world and our e-commerce sales; and fifth, develop new opportunities for our brand to be sold outside of our retail store base.

During the second quarter we advanced each of these objectives and we are excited about the lineup we have in place for the rest of the year. In product innovation, our focus on larger merchandise stories was successful with the Enchanted line, Zoo collection and the Ice Cream Bears collection, all of which sold at or ahead of our plans and we have achieved higher out-the-door selling price on the animals.

On the product side, our upcoming statements include the Love Hugs Peace bears, capitalizing on a key fashion trend with new animals and coordinated clothing and accessories. In August we will introduce for the first time a SANRIO collection that features Hello Kitty and three of her friends for a more forceful presentation on this strong licensed character.

The collection will be available for a focused three-week window with a strong gift with purchase. We will also have excitement in September as we start to gear up for Halloween and kick off a tie in to the 30th anniversary of Star Wars Empire Strikes Back. All in all, we are very excited about the cadence and content of our product introductions.

Our second strategy is to improve the execution and coordination of our products, marketing and store operations by having one product theme supported by one focused message and one strong promotion.

We have several exciting offers and tie ins. For example, in addition to the adorable products, our Ice Cream bears had a special two for $35 multi-animal pricing promotion which resulted in doubling our standard rate of two animal transactions for this grouping.

The Ice Cream bears also featured a tie in of Baskin-Robbins stores in North America and we will continue to selectively offer tie ins with relevant partners on future products.

On the heels of Ice Cream, our back-to-school bundle promotion has returned in which our customers can get any animal, any outfit and any pair of shoes for $29.99 during a two-week timeframe.

Following the bundle promotion we will build on the success we have had with our GWPs in the first half of the year as we operate great messenger bag gift with purchase with qualifying transactions. We are making it easy for moms to say yes to Build-A-Bear Workshop at a time when she and her kids will be out in the malls stocking up for back-to-school necessities.

Each product launch is the single focus of our stores and is supported with powerful visuals at our lease line as well as clear, operational messaging and execution. We will continue to use television advertising in the US to stimulate kid demand for the products and we will speak to moms in the digital space.

The response with our repeat guests through our direct mail programs has been strong this year and we are working on specific plans to continue to improve this key contact tool. We are addressing the sales decline in our European business to get back into the plus column.

Up to this point we have grown our business in the UK by replicating North American best practices to improve our store experience, deliver more consistent new products, manage inventory levels and grow our brand awareness.

We believe that we will need to be more aggressive in our outreach in brand and product promotion as a natural progression of our business model and to fit the current retail and economic environment of the market.

Our third strategy is to give consumers more reasons to come to Build-A-BearWorkshop by expanding our leadership in the toy business with products that reinforce our brand. This will be achieved through external sources as well as internal development.

In September we are very excited about the launch of our new proprietary brand Small Fries. Small Fries is a line of smaller animals that are already stuffed and are packaged in a box resembling a French fry box with captions playing off the brand name such as Feed Your Friendship or Animal Provides 100% of the Daily Nutritional Requirements of Friendship Characteristics such as Hugs, Laughter and Smiles.

Small Fries can be dressed, will have a Build-A-Bear tie in and are priced at $12 for the animal and $7 for the clothes. The launch will be supported with a fully integrated marketing program including a national TV advertising campaign in the US to get the word out to kids.

We've done extensive research with this new line and found it is highly appealing to younger girls to think of them as babies to their bigger Make Your Own animals and to older girls who love the mobility and collectibility of the entire series of eight animals.

We expect this initial limited addition two-month run of Small Fries to be in high demand as they will be added on to core transactions as well as increased impulse purchases.

Looking at externally sourced, non-proprietary products, during the quarter we expanded the Zhu Zhu Pets product line to all our US stores. We initially tested Zhu Zhu products at the end of last year. The test performed well and we acted quickly to get it in to all of our stores.

The sales on the rollout are not performing up to the best levels and the line overall is under significant competitive pricing pressures that are somewhat unprecedented for a hot toy so early in its life cycle. We are taking aggressive action to move the products by reducing our average retails.

Zhu Zhu Pets have been a modest part of our business and we expect to be able to offset the impact of these price reductions with other proprietary products in our mix. We continue to advance our fourth strategy to grow sales on our e-commerce site and increase engagement in our virtual world.

Although online sales in the second quarter declined by 3.6%, generally reflecting our store trend, they are up 6% on a year-to-date basis with flat year-over-year sales in June and back in the growth column on a double-digit basis for July.

Build-A-Bearville remains critical in our brand relationship with kids and we showed solid growth in our key metrics of unique visits, time spent online and animal conversion to the site. As we have more seamlessly integrated our real world and virtual world to build buzz for new products, deliver coupons and promotions to bounce people to our stores and increase our overall brand engagement, our community has continued to build.

For example, the tie in to our annual Camp Happy Heart with our Ice Cream bear collection resulted in over 700,000 campers signing up this year, over 60% from 2009's camp enrollment. We consider Build-A-Bearville a key strategic platform and believe it to be an asset that has value to many brands that want to reach the tween demographic.

As we explore multiple ways to monetize Build-A-Bearville we are working with complementary brands to form partnerships in the virtual space similarly to ways we have partnered with powerful, relevant brands in the real world.

While many of our plans are still in development we are continuing to move this platform to the next level and will update you further on the next call as we continue to break new ground as the only company that has the ability to reach kid consumers in both virtual and real world spaces giving us competitive edge to monetize and grow revenues from this asset.

Finally, our licensing strategy continues to move forward. Our licensing revenue in the quarter increased versus last year with the launch of the Wii and Nintendo DS games by Activision. As Maxine mentioned, we will also be launching an exclusive Craft line to be carried in Michael stores starting in September.

We found that we have a significant overlap of guests that shop in Michael's stores who rated the Craft kits very highly. Each kit that is sold includes a Build-A-Bear tie in as well as a bounce back to a Build-A-Bear Workshop store or to our e-commerce site.

We also expect this line to reach new guests and to increase traffic to our stores as they play and engage with our brand in a uniquely creative way.

In summary, we feel good about our core products and the cadence of the introductions and promotional support. We believe Small Fries will be a big hit on a broad age and gender basis and we believe our strategies are taking hold and moving us toward our larger goals and objectives.

Now I'll turn the call over to Tina to review our financial results and outlook in more detail.

Tina Klocke

Thanks, John, and good morning, everyone. I will provide additional details related to our second quarter fiscal 2010 financial performance.

For the second quarter total revenues decreased 10.5% to $74.1 million from $82.8 million in the second quarter last year. Consolidated net retail sales decreased 10.2% excluding the impact of foreign currency. The decrease in sales was driven by a 9.7% decrease in North American comp store sales and an 11.2% decrease in European comp store sales.

Consolidated comparable store sales declined 10% and included 11.7% decrease in transactions offsetting a 2% increase in average transaction value.

Total retail sales from our European operations decreased 11.1% excluding the impact of foreign currency. Net loss from European operations was $1.7 million as compared to a loss of $1.2 million last year.

International franchise revenue increased to $661,000 from $612,000 last year. We ended the quarter with 60 international franchise stores versus 61 in last year's second quarter. During the quarter we expanded our franchise business with a successful launch of our first location in Mexico.

Turning to licensing, revenue in the second quarter was $985,000, up from $915,000 last year. The increase in licensing revenue reflects higher projected sales from our Wii and Nintendo DS games.

As we mentioned last quarter, our 2009 licensing revenue reflects an immaterial reclassification of cost of sales that previously had been netted to licensing revenue. There is no impact on the 2009 net loss. We continue to expect licensing revenue in fiscal 2010 to be in the range of $4.5 million to $5 million, which includes the impact of this reclassification.

Retail gross margin decreased 200 basis points to 30.9% from 32.9% in the second quarter last year, a 20-basis point increase in merchandise margin was more than offset by a 220-basis points of deleverage in occupancy cost.

Total SG&A in the second quarter was $36.4 million or 49.1% of total revenues compared to $37.5 million or 45.3% of total revenue in the 2009 second quarter.

For the quarter we recorded a tax benefit of $4.1 million which compares to a tax benefit of $4.5 million in the second quarter of 2009. Net loss in the second quarter was $8.5 million or $0.45 per share compared to a net loss of $6 million or $0.32 per share in the second quarter last year.

Net loss for the second quarter of fiscal 2010 included a non-cash charge of approximately $300,000 or $0.02 per share related to the impairment of certain long-term deposits. Net loss for the second quarter of fiscal 2009 included a charge of $100,000 or $0.01 per share for the closure of Friends to be Made retail concept as well as a non-cash charge of $325,000 or $0.02 per share related to our investment [in wine makers].

For the first six months of fiscal 2010 total revenues decreased 2.7% to $175.6 million from $180.5 million in the first six months last year. Consolidated net retail sales decreased 3.4% excluding the impact of foreign currency.

The decrease in sales was driven by a 3.3% decrease in North American comp store sales and a 3.6% decrease in European comp store sales. On a consolidate basis our comp stores sales decline was 3.3%.

Net loss from our European operations total $1.5 million compared to a net loss of $1.9 million last year. Retail gross margin increased 190 basis points to 36.8% from 34.9% resulting primarily from 120 basis point increase in merchandise margin and 60 basis points of leverage in buying and distribution costs.

Total SG&A increased 2% to $75.9 million from $74.4 million in the first six months of the year mainly reflecting an increase in compensation costs. Net loss for the first six months of 2010 was $6.8 million or $0.36 per share equal to the first six months of last year.

During the quarter we repurchased approximately 244,000 shares of our common stock at a total cost of $1.9 million. At quarter end we had approximately $27.7 million of availability under the current stock repurchase program, which was extended through March 31, 2011.

Regarding cash flow, we ended the quarter strong with consolidated cash of $31.2 million. As a reminder, we are an international company. At quarter end over 60% of our cash on the balance sheet was held in the UK.

Because our cash fluctuates evenly we evaluate our use of cash on a continual basis. Our cash usage peaks ahead of holiday and key business periods as we build our inventories. We will continue to evaluate all opportunities to enhance shareholder value including opportunistic purchases of our company's stock subject to market conditions.

We will also allocate our resources to opportunities that are expected to increase the sales productivity and profitability of our company.

Depreciation and amortization for the quarter was $6.8 million compared to $7.1 million for the second quarter of 2009. For the full year 2010 depreciation amortization is expected to be approximately $28 million.

At the end of the quarter consolidated inventories totaled $57.1 million compared to $47.8 million at the end of the second quarter 2009. Inventory per square foot increased approximately 1.9% excluding non-comparable Zhu Zhu Pet inventory.

Capital expenditures in the second quarter were $3.2 million, up $1.6 million compared to the second quarter 2009, primarily due to software and equipment upgrades to our e-commerce platform and the opening of one new store in the US. We continue to expect capital expenditures for the full year to be between $12 million and $15 million.

As we move forward through fiscal 2010 our top priority continues to focus on reigniting profitability growth for our company. The positive response to our store experience is best demonstrated through our customer satisfaction scores, which reached 82.5% highly satisfied for the second quarter.

As John outlined, we have a great lineup of product and marketing initiatives planned for the third quarter and our performance thus far in July shows we are off to a great start.

This concludes my remarks. Now I'll turn the call back to Maxine.

Maxine Clark

Thank you, Tina. I'll conclude the call with just a few comments. While we are not happy with our second quarter results, we feel good about the strong start for the third quarter and are focused on delivering our biggest volume fourth quarter to achieve our fiscal year objectives.

While we'll be updating you on the full breadth of our holiday strategies on our next call, I do want to add that we are excited to announce that after our success in 2009, Holly and Hal Moose, our uplifting Christmas adventure will air for its second holiday season on ABC Family.

Our holiday television special is an extension of our initiatives and entertainment. It is a meaningful way for us to broaden our broad exposure while strengthening our relationships with existing guests. We will also be featuring these characters and licensed products that are sold at other retails, building synergy across several of our key strategies.

This year will certainly have additional challenges but we are confident that our strategies will allow us to achieve our number one objective of increasing shareholder value by profitably growing our sales.

We'll now open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tom Filandro - Susquehanna Financial Group.

Tom Filandro - Susquehanna Financial Group

I don't want to detract too much from the course given business but I do have a multi-part question related to the Zhu Zhu Pets, John. What impact did Zhu Zhu Pets have on sales and margins in the quarter and given the price promoting that you're currently experiencing, the classification, how should we think about the margin impact during the second half?

Is it fair to assume no more Zhu Zhu Pet buys will be made and when should the inventory differential related to Zhu Zhu Pets normalize? Just a quick comments; anything on the Zany Bandz.

John Haugh

Let me start and if anyone else wants to jump in please let me know. So first part is sales and margin on second quarter, little to not; we've said before it's a very modest percent of our business and, frankly, as our animals have continued to get stronger it has gotten even smaller.

It did test well. We brought it in in kind of late December. It tested very well. It tested well through January at which point we had to make buys. We bought product. Then, as you're well aware, the market just got hit up very quickly and pricing got very aggressive very quickly. So from our perspective it has been a good complementary business that we will work to exit profitably.

We do not see at this point an impact to our overall delivered gross margin because as it's a modest part of our business and a proprietary product has good strong gross margin and we've got a couple more things up our sleeve, we think we can more than offset any discounting we're going to have to do to get rid of it.

We do not at this point see ourselves buying into that line again. They had a couple other launches, just didn't make sense for us, not necessarily against our core demo and too many SKUs. As an example, the Kung Zhu just would have required a lot of SKUs and not something that would have been accretive to our business.

Then I think the last part of the question was Zany Bandz. We took a real small position on Zany Bandz because it's very hot. We've got a proprietary bear head, heart, bear paw set of Zany Bandz that will be in stores in about mid-August. We will run that for about -- kind of through September, October, pick up a little bit of incremental business up at our Take Me Home.

All of our reads so far has shown that when Zany Bandz goes out in a transaction it is an added UPT, or we call it a bag, so we feel good about that. I think I missed the one part of your question which is where do we think we'll be from an inventory standpoint?

We still have a lot of the year to go but we are working toward exiting the Zhu Zhu product by year end and getting our inventory back in line. So that's our plan right now.

Operator

Your next question comes from the line of Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

Could you talk a little bit about Europe and whether you think there have been some significant and during changes in the marketplace there? Related to that, what would be the potential profit implications of the changes that you addressed earlier in your comments in the European marketplace?

Maxine Clark

In the UK, Sean, we believe that the consumer sentiment will remain weak for some time combined with the election results and not only their [vat] increase January of this year. They are also looking forward to an [vat] increase of January of 2011.

But overall, on a long-term basis, we really believe we have continued growth in the UK. We're in good retail locations. We have a strong operation team and we're still newer in our life cycle. We see the opportunity to add more stores over the longer term.

Really regarding the quarterly loss, the lower comps caused negative leverage of six occupancy and other costs but also remember they were affected by a switch in Easter also.

Operator

Your next question comes from the line of David Schick - Stifel Nicolaus.

Jamie Albertine - Stifel Nicolaus

This is actually Jamie Albertine in for David. I had a quick question for you, one clarification on the back-to-school bundle promotion. I just wanted to know if that had happened already or if that's coming up in the third quarter.

Then kind of thinking more about the second quarter, now that you've transitioned into this new philosophy of promotions, one every three to four weeks instead of one every two to three, just how do you guys think about monitoring performance of that transition and take it in sort of a traffic perspective? It seems like your customer satisfaction scores continue to increase. So just any thinking on that would be helpful.

John Haugh

Why don't I jump in, Jamie? The bundle promotion actually broke last weekend and will run through this weekend. The good thing is with this weekend we think we really have time to -- our Ice Cream bears came in and were very, very successful.

As we started to sell out of that and we sold a lot of units, we felt good about that. As we started to sell out of that we broke our $29.99 promotion. We came up a little bit earlier this year versus last year because while it was successful last year, frankly, we think we were a little bit late and this was a better time when we looked at kind of when kids went back to school across the country.

So we are halfway through it. We will run through this weekend and then we will follow this with a strong follow up gift repurchase with a messenger bag that we think every single kid in America is going to want to bring to school with them.

Promotion philosophy, I think what we really believe in, as we've said, is product leads the way and if we have good product our business works. If that product can get communicated effectively through our marketing and have good, strong alignment at the stores we are successful.

So although we have kind of increased our cadence and, frankly, gotten a little bit more promotional, our average ticket has gone up, as Maxine stated earlier. Our traffic is up so we feel like we are moving in the right direction.

We are not a promotional business but we do have to be cognoscente of what's going on in the world and when we are in malls and you walk up and down and see the lease lines and everyone's got a lot of promotional signage, we're not going to go toe-to-toe on big discounting but we do need to be able to offer the consumer a reason to make a purchase with us that day.

Gift repurchases we've found to be very effective. In some cases it's price promotion. But ultimately good product is what helps us deliver the results.

Operator

(Operator Instructions) Your next question come from the line of Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I was wondering if you could talk a little bit about your marketing spend outlook going forward given that it seems like your promotional strategy is becoming more aggressive in the United States and because it sounds like you'll have to do some more marketing in Europe as well.

I got on the call a little bit late. I know you're doing some new product introduction this month and then with Small Fries. I'm wondering if there's a stronger schedule of new product introduction that is programmed for the rest of the season versus last year.

John Haugh

I'm going to jump in. This is John. Apologies, I've got the first part. Somebody's going to have to prompt me on the second part of the question. I apologize.

Janet Kloppenburg - JJK Research

(Inaudible). Go ahead.

John Haugh

Why don't you give it to me real quick, the second part of the question?

Janet Kloppenburg - JJK Research

I was wondering if you could talk to us a little bit about the new product introduction schedule for the third and fourth quarter versus last year. I'm thinking that there will be a greater level of new product introduction and I wanted to know how you want us to think about that.

John Haugh

So from a marketing spend we actually -- in 2009 we took a pretty sizeable amount out of our marketing budget from 2008 and in 2010 we have modified the budget yet more. However, we think we've gotten even more strategic and precise with the budget. So we talk to kids through Kids TV. We talk to moms through the digital space, as we've said before.

We use our Stuffer Stuffer, our database, which is our loyalty program and we have gotten more effective in terms of the response rate on our communication that way. So we are actually going to spend a little bit less from a marketing standpoint.

We are increasing -- our net net is down. We have done some reallocation. We have gotten a little bit more aggressive with signing in our stores and our lease lines. Our best message to the consumer is our real estate. We have great locations in 300 malls across the US and 50 across North America and 50 across the UK.

So we really put a lot of energy there in terms of signing and alignment and training with our store teams. So we feel very good about how we are spending our marketing dollars and we continue to bring our A-to-S, advertising-to-sales, down.

With respect to schedule of product, when you look at our products for the whole year, we actually -- in 2009 and 2008 we launched lots of product and a lot of good product. We've really tried to group or bucket things a little bit versus just more.

So where we might have lost two or three animals in a month, this year we will try to pull those together into a collection which gives us a more unified theme, allows our stores to be more focused. So it's not necessarily a net more animals, maybe a little, but it's much more trying to bring them together and trying to tell fewer but larger messages.

We do have all the animals lined up for the remainder of the year and we feel really good about our programs. As we go all the way through December we're going to be bringing back a great equity that's worked for us in the past as well as some really other fun stuff and we'll talk more about that at the next call.

As we look at third quarter we think, as we alluded to, a lot of good product. Peace and Love, as we said, breaks this next -- the weekend that we're coming up on, tomorrow. We follow that up with a great SANRIO and we've got strong Halloween and a strong tie in with Star Wars to end third quarter and fourth quarter as strong as well.

Maxine Clark

Janet, it's Maxine. Just in addition to what John said because I think we used to always look at our launches as just animals, meaning either it was one or two animals in a given month but now we do clothing collections also that launch with them. So for instance in the Zhu collection there was a line of clothing that went with them that actually also was able to be brought to life on Build-A-Bearville.

But in the Ice Cream collection we had for each animals, there were four animals, we had four different outfits. The selling correlation with those was very, very strong. So when somebody walked out with a $20 Ice Cream bear they also walked out with an outfit and possibly shoes.

In the collection that we have for Peace and Love that's coming out tomorrow is also there's clothing that goes along with it and that's all part of the launch, which we really hadn't done before. Then when we're focusing on Star Wars there is a bear, only one bear in that collection, but there is also a series of outfits that are very adorable and already some of them -- the first collections have sold really well for us.

So it gives us an opportunity to sometimes take another part of our -- a very important part of our business to a next level and associate it very strongly. If you look at any of our mailers and even our television commercials you now start to see the animals for the most part dressed and accessorized with the theme that we're talking about. So that's a difference to our strategy in the past.

Operator

Your next question comes from the line of Tom Filandro - Susquehanna Financial.

Tom Filandro - Susquehanna Financial

Two quick ones; one, can you just update us on the party business and if you guys are doing anything to further drive the performance there? I just want to ask a cost question. Are you seeing any increases for the buys to 2011? If you are, any strategies in place to put pressure on [ASD]?

John Haugh

Tom, why don't I hit costs first if I can? As you are aware and I think as everyone knows, there's a lot of pressure in Asia right now on labor. Mills are getting -- factories and mills are getting tighter. They're looking for larger MOQs. It's costing more to get stuff from their port over to this side, so we have pricing pressure, frankly, across the line.

That said, we've had a lot of pricing pressure in 2010 and, as Tina told you, we've actually, despite that, been able to move our merchandise margins up. We have started planning 2011 already. We don't plan quite as far out as a Walmart or a Target, so we're really kind of into just the first quarter at this point.

But we have sat down with all of our partners. Our team is actually on the way over to Asia Monday to work on this and we realize that there will be pressure and so our ways to combat that are to work tightly with our partners and work on lead times and try to produce at opportune times. It is to look at any kind of pricing opportunities when it makes sense for us.

We have in some cases made pricing moves within our line and in some cases it's worked really, really well for us. So we will continue to be smart about that but we will not -- we won't go away from what our core business is, which is we're going to offer a $10 bear we have since we started and we still will.

Then we will also just continue to take a look at the line and the number of SKUs and say, all right, are there ways to drive these bigger stories, both animals and the company merchandise, as Maxine mentioned, and how do we use that to as we buy bigger, how do we buy smarter?

Looking at other sources most of our stuff comes from China right now. We're looking at Vietnam and Cambodia and places like that. Frankly, it doesn't really pay at this point. The infrastructure isn't there. It's a longer lead time. A lot of our raw materials and stuff come out of China. So we're looking at that but we're not -- but right now it doesn't make sense for us to leave China.

With respect to party sales, they are running roughly the same percent of our business that they did last year, actually just up slightly, up two-tenths of a percent. We think this is a good business. We think there is opportunity to continue to grow it. We do have a test in place where we're trying to figure out some way to use some of our bundling strategy that's worked for us.

We're not quite there yet but we are relooking at what should be offered to the party kind of guest of honor. How do we drive that business? So we think it's an opportunity. We don't have it solved yet but we're going to continue to stay on it.

Maxine Clark

The second part of your question is our party businesses for the quarter is up slightly over last year as we continue it as a focus as part of our store operation and our marketing.

Operator

Your next question comes from the line of Justin Orlando - Dolphin Management.

Justin Orlando - Dolphin Management

Just one question; given the kind of cost pressure you're seeing on the gross margin line and the revenue performance thus far this year I'm wondering if our total cost structure is right size for the opportunity you guys are seeing. Can you give us a little bit more detail into the SG&A line, maybe a couple of the categories and the percentages that those categories are of the total?

Maxine Clark

Well, we said basically that our SG&A was up for compensation cost over the prior year and prior quarter that we did not have in the past from a perspective of our overall strategy on retention of our teams. Other portions of our SG&A were up and down slightly but nothing that was major.

Operator

That concludes today's question-and-answer session. I would now like to turn it back over to management for concluding remarks.

Maxine Clark

Thank you all for your questions and we'll look forward to talking to you during the quarter and at our next call next October.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.

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